Schroders plc - Half-year results to 30 June 2023 (unaudited)

• Our diversified business has again delivered resilient results despite the challenging operating environment, generating operating profit of £341.4 million.

• Our strategic rebalancing towards higher growth and increased longevity areas enabled us to deliver overall net new business of £5.7 billion, excluding joint ventures and associates. Our three strategic growth areas of wealth management, private assets and solutions generated combined net new business of £11.8 billion.
• We aim to provide excellent investment performance^[1] to our clients through active asset management. Our key performance indicator, three year investment performance, remains strong with 77% of client assets outperforming their relevant comparator, while 73% outperformed over five years.
• We have maintained our interim dividend of 6.5 pence per share.

Peter Harrison, Group Chief Executive, commented:

“Our business strategy has enabled us to deliver resilient results in the face of ongoing industry headwinds. Clients continue to value our differentiated investment capabilities and entrust us to manage their assets for the long term. We attracted £5.7 billion of net new business, with £11.8 billion of that coming from our strategic growth areas. We are pleased with the positive progress in wealth management and solutions, which performed well during the turbulent period in the UK government bond market. Even with the uncertain market conditions, we experienced positive net new business in European and US mutual funds.

“In recent years, our investment in the business has led to a robust operating platform with advanced technology capabilities at its core. We remain focused on effectively managing costs and maximising efficiency benefits from our platform.

“Our resilient strategy, diversified capabilities and global footprint give us continued confidence in the long-term outlook for the business.”

Management statement

The shape of our business has evolved greatly. Today, our strength comes from our diversification across geographies, clients and investment strategies that allows us to access areas of higher growth and increased longevity. We have built a complete client offering across wealth management, private assets and solutions alongside our public markets capabilities.

Financial performance

We delivered positive net new business (NNB) of £5.7 billion excluding joint ventures and associates (H1 2022: £4.4 billion) despite persistent inflation, higher interest rates and expectations of a cyclical slowdown. Wealth Management saw continued strong demand, generating NNB of £3.7 billion, while Solutions flows returned following our successful navigation of the gilt crisis in the second half of 2022, ending the period with net inflows of £6.3 billion. Our private assets business delivered positive NNB of £1.8 billion and despite unfavourable market dynamics, generated fundraising of £5.3 billion in the first half of 2023. Mutual Funds and Institutional felt the impact of the “risk-off” market sentiment and saw net outflows of £0.8 billion and £5.3 billion, respectively. Including joint ventures and associates, NNB was £0.4 billion (H1 2022: £8.4 billion).

Our purpose is to provide excellent investment performance to clients through active management. Our key performance indicator, investment performance over three years, remains strong with 77% of client assets outperforming their relevant comparator, while 73% outperformed over five years.

Assets under management (AUM) excluding joint ventures and associates increased to £618.3 billion (FY 2022: £616.5 billion). This was despite the strengthening of Sterling, which reduced AUM by £21.7 billion. This impact was more than offset by the combination of positive NNB and market returns, including investment performance, which increased AUM by £5.7 billion and £17.8 billion respectively. AUM including joint ventures and associates decreased by 2% to £726.1 billion (FY 2022: £737.5 billion).

Net operating revenue was £1,169.8 million (H1 2022: £1,178.0 million), including performance fees and net carried interest of £32.6 million (H1 2022: £21.5 million) and net banking interest of £30.2 million (H1 2022: £12.9 million). The 1% decrease in net operating revenue was driven by the impact of lower average AUM and reduced real estate transaction income. Average AUM was £627.2 billion, down from £646.2 billion in H1 2022, as a consequence of the difficult market conditions experienced in the second half of 2022. Net operating income was £1,211.9 million (H1 2022: £1,240.3 million).

Our operating expenses for H1 2023 reflect the higher ongoing costs of running a larger, more diverse business. The costs of the three strategic acquisitions we made last year to drive future revenue growth, as well as our continued investment in our China business, were not fully reflected until H2 2022. Operating expenses for the period were £870.5 million, up £37.1 million from the same period in 2022 (H1 2022: £833.4 million) but were down £48.6 million from H2 2022. Operating compensation costs were £558.8 million (H1 2022: £535.5 million) and operating non-compensation costs were £311.7 million (H1 2022: £297.9 million). Our operating profit was £341.4 million (H1 2022: £406.9 million) and profit before tax ended the period at £275.6 million (H1 2022: £312.8 million).

The Board has declared an unchanged interim dividend of 6.5 pence per share (2022 interim restated dividend: 6.5 pence per share^[2]). The dividend will be paid on 21 September 2023 to shareholders on the register at 18 August 2023.

Strategic progress

As our business has grown, we have taken steps to increase our operational efficiency in order to support our financial performance. This year, we have focused on targeted operating model improvements in two areas to drive future cost efficiencies.

First, we have announced plans to relocate a number of roles from our Wealth service centre in Switzerland to the Group's operational hub in Horsham, UK. This move is designed to support our significant growth ambitions for our Wealth Management business globally. This will deliver cost savings that will help us realise our ambition to grow Wealth Management operating profit at a compound annual growth rate of 10% from 2022 to 2025, excluding the effects of markets, FX and acquisitions.

Second, in Group Technology, following our successful migration to the Cloud, we are consolidating external contractors and third-party resources into one development centre. This move is part of our strategy to implement a more efficient resourcing model and manage capacity across multi-year projects in a more cost-effective manner.  This will result in the avoidance of future spend over the next few years. Combined, these two projects have resulted in us recognising restructuring costs of £23.5 million in the current period. We will continue to evolve our operating model to deliver an efficient and robust platform for the future.

China remains an important area for geographic expansion in our public markets business. In June this year, we announced that the China Securities Regulatory Commission (CSRC) had granted us a licence to begin operating a wholly foreign-owned public fund management company (FMC). This is the latest addition to our broad set of business licences that give us comprehensive market access in China. These, combined with our investment expertise, mean we are well placed to capture the growth potential of the China market over the medium to long-term.

Asset Management segment

Asset Management net operating income ended the period at £996.0 million (H1 2022: £1,037.8 million), as the market falls in the second half of 2022 led to lower average AUM of £526.2 billion (H1 2022: £547.1 billion). Operating profit was £265.5 million (H1 2022: £329.0 million).

Following the strategic acquisitions of Greencoat Capital and Cairn Real Estate last year, our private assets business, Schroders Capital, now houses a more complete suite of solutions for our clients. By combining our private markets offering with the strength and expertise of our public markets business, we have created unique opportunities, such as the launch of the UK’s first Long-Term Asset Fund (LTAF). These regulated open-ended investment vehicles are designed to enable a broader range of investors with longer-term horizons to invest efficiently in illiquid and private assets.

Private assets have experienced a slowdown in the first half of 2023 in terms of fundraising, investment activity and valuations. Despite asset repricing and pressure on fundraising activity across asset classes, Schroders Capital generated gross fundraising of £5.3 billion. This contributed to positive NNB of £1.8 billion (H1 2022: £4.8 billion), with AUM closing the period at £68.2 billion (FY 2022: £68.3 billion). Non-fee earning dry powder^[3] was £3.9 billion at the end of June 2023 (FY 2022: £4.0 billion). Schroders Capital net operating revenue including performance fees and carried interest increased by 12% compared to the first half of 2022 to £216.6 million (H1 2022: £193.2 million).

Solutions responded strongly to the gilt crisis in autumn last year and generated net inflows of £6.3 billion (H1 2022: £6.3 billion), demonstrating our strong reputation and the compelling proposition of the combined business following our acquisition of River and Mercantile’s Solutions business in 2022. AUM rose to £212.1 billion at the end of the period (FY 2022: £210.2 billion). Solutions net operating revenue including performance fees was £137.1 million (H1 2022: £147.4 million).

Our public markets business is typically more impacted by the cyclicality of markets. Despite weak investor sentiment, Mutual Funds performed well. Positive net flows in the first quarter were offset by the “risk-off” environment in the three months to June, leading to £0.8 billion of net outflows in the first half of 2023 (H1 2022: net outflows of £2.9 billion). In the US, net inflows into our strategic partnership funds with Hartford totalled £0.9 billion. We have continued to innovate and evolve our Mutual Fund offering, focussing on Sustainability and Thematics. In our Global Climate Leaders fund we launched carbon offset share classes to provide clients with the choice to offset carbon emissions associated with their proportion of the fund’s underlying holdings. AUM in Mutual Funds was £100.4 billion (FY 2022: £100.8 billion). Mutual Funds net operating revenue declined by 6% to £355.2 million (H1 2022: £379.7 million) given the lower average AUM in the first half of 2023.

Institutional saw net outflows of £5.3 billion (H1 2022: net outflows of £7.6 billion), principally from lower-margin mandates. Institutional AUM closed at £135.0 billion (FY 2022: £139.1 billion). Institutional net operating revenue including performance fees and carried interest declined by 5% to £250.9 million (H1 2022: £263.1 million).

Asset Management joint ventures and associates

Our venture with Bank of Communications (BOCOM) in China was affected by headwinds principally as a result of the turbulence in fixed income markets in China. AUM decreased by 16% due to the impact of foreign exchange movements and negative investor sentiment in the first half of 2023.

Our total share of profits from Asset Management joint ventures and associates was £33.9 million (H1 2022: £37.9 million). Asset Management joint ventures and associates AUM ended the period at £94.1 billion (FY 2022: £107.7 billion), impacted by outflows of £5.5 billion (H1 2022: inflows of £3.8 billion) and foreign exchange movements.

Wealth Management segment

Wealth Management delivered impressive net new business growth in the first half of the year, with an annualised advised NNB growth rate of 8%. Total NNB was £3.7 billion (H1 2022: £3.8 billion), made up of £2.4 billion of advised, £0.4 billion of platform and £0.9 billion of managed NNB. Net operating income increased 7% to £215.9 million (H1 2022: £202.5 million), driven by continued strong NNB growth and higher net banking interest. Operating profit was £75.9 million (H1 2022: £77.9 million).

AUM in our Schroders Personal Wealth (SPW) joint venture ended the period at £13.7 billion (FY 2022: £13.3 billion), with net inflows of £0.2 billion.

Wealth Management AUM including SPW increased 4% over the first half of 2023, ending the period at £116.3 billion (FY 2022: £111.4 billion). This comprised £75.2 billion of advised AUM, £17.9 billion of platform AUM and £23.2 billion of managed AUM. On the current trajectory, we see a promising NNB growth rate at the higher end of our 5-7% target for the full year.

Outlook

Our strategic rebalancing of the business has positioned us to access increased longevity and higher growth areas of the market which offer greater stability and resilience. Our differentiated investment capabilities and broad geographic reach mean we can provide investment solutions for a wide spectrum of clients. We continue to evolve our operating model, building an efficient and robust platform to support future growth. We remain confident in our ability to deliver on the targets we have set for Wealth Management and Schroders Capital. We intend to grow our market share in Solutions and maintain our leadership in sustainability.

^[1]Please refer to full regulatory news service (RNS) announcement for more information about client investment performance.

^[2] Dividends per share have been restated following the simplification of the Company’s dual share class structure. Please refer to full regulatory news service (RNS) announcement for further information.

^[3] Committed non-fee earning assets not yet recognised within AUM and NNB.